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Go Public or Stay Private: A Theory of Entrepreneurial Choice

  • Boot, Arnoud W A
  • Gopalan, Radhakrishnan
  • Thakor, Anjan

In this Paper we analyse an entrepreneur/manager’s choice between private and public ownership in a setting in which management needs some ‘elbow room’ or autonomy to manage the firm optimally. In public capital markets, the corporate governance regime in place exposes the firm to exogenous controls, so that management may lack the autonomy it desires. By contrast, private ownership can provide management with the desired autonomy due to the possibility of precisely-calibrated private contracting. The disadvantage of private ownership (relative to public ownership) is that it imposes a cost of illiquidity on those who provide financing. We explore this trade-off between managerial autonomy and the cost of capital in a simple setting and draw a number of new testable implications.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4219.

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Date of creation: Feb 2004
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Handle: RePEc:cpr:ceprdp:4219
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  1. Marco Pagano & Fabio Panetta & and Luigi Zingales, 1998. "Why Do Companies Go Public? An Empirical Analysis," Journal of Finance, American Finance Association, vol. 53(1), pages 27-64, 02.
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  6. Lerner, Josh & Schoar, Antoinette, 2004. "The illiquidity puzzle: theory and evidence from private equity," Journal of Financial Economics, Elsevier, vol. 72(1), pages 3-40, April.
  7. Kaplan, Steven & Strömberg, Per Johan, 2000. "Financial Contracting Theory Meets The Real World: An Empirical Analysis Of Venture Capital Contracts," CEPR Discussion Papers 2421, C.E.P.R. Discussion Papers.
  8. Franklin Allen & Douglas Gale, 1999. "Diversity of Opinion and Financing of New Technologies," Center for Financial Institutions Working Papers 98-30, Wharton School Center for Financial Institutions, University of Pennsylvania.
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  16. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December.
  17. Bengt Holmstrom & Steven N. Kaplan, 2003. "The State Of U.S. Corporate Governance: What'S Right And What'S Wrong?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 15(3), pages 8-20.
  18. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
  19. Burkart, Mike & Gromb, Denis & Panunzi, Fausto, 1997. "Large Shareholders, Monitoring, and the Value of the Firm," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 693-728, August.
  20. Marco Pagano & Ailsa Röell, 1998. "The Choice Of Stock Ownership Structure: Agency Costs, Monitoring, And The Decision To Go Public," The Quarterly Journal of Economics, MIT Press, vol. 113(1), pages 187-225, February.
  21. Arnoud W. A. Boot & Anjan V. Thakor, 1998. "The Many Faces of Information Disclosure," William Davidson Institute Working Papers Series 80, William Davidson Institute at the University of Michigan.
  22. Mello, Antonio S. & Parsons, John E., 1998. "Going public and the ownership structure of the firm," Journal of Financial Economics, Elsevier, vol. 49(1), pages 79-109, July.
  23. Brian J. Bushee & Christian Leuz, 2003. "Economic Consequences of SEC Disclosure Regulation," Center for Financial Institutions Working Papers 02-24, Wharton School Center for Financial Institutions, University of Pennsylvania.
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